The Canadian dollar has staged a strong recovery from its mid-year lows, climbing more than 3.5% from its June low through late August as the US-Canada interest-rate differential narrowed, according to Scotiabank Economics in a note.
The loonie has remained resilient despite heightened trade tensions, with economic data suggesting the Canadian economy continues to show strength, wrote the bank in a Thursday note.
A more hawkish Bank of Canada and softer Federal Reserve outlook have boosted the loonie, narrowing yield spreads and shifting market positioning in favor of the Canadian dollar, said Scotiabank.
Much of the negative trade news appears priced into the currency, while Canadian positioning remains heavily short, according to the bank. A revival in trade talks with the US could leave room for additional loonie gains.
Scotiabank expects USD/CAD to fall, with a target of CA$1.37 by year-end and CA$1.33 by the last quarter of 2027.